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From Subsistence to Exchange and Other Essays
by Peter Bauer (Princeton, N.J.: Princeton University Press, 2000); 153 pages; $24.95.

FREE-MARKET ECONOMIST Peter T. Bauer is 85 years old this year. During the 55 years since the end of the Second World War, Bauer has been one of the most articulate and insightful critics of economic planning and government intervention in the field of development economics. During this period most academic economists and all of the international organizations, such as the International Monetary Fund and the World Bank, fostered the belief that only government control and direction of economic activities could ensure growth and prosperity for underdeveloped countries in the Third World and promoted policies based on that belief. Bauer, who is now professor emeritus at the London School of Economics, insisted that these policies would result in stagnation, corruption, and continuing poverty for tens of millions of people in Asia, Africa, and Latin America. Only the market economy and individual freedom could offer a path to real economic development and sustainable rising standards of living for an increasing circle of people around the world.

Some of Professor Bauer’s most important works on this theme have been West African Trade (1954); The Economics of Underdeveloped Countries (1957); Economic Analysis and Policy in Underdeveloped Countries (1957); Indian Economic Policy and Development (1961); Markets, Market Control and Marketing Reform (1968); Dissent on Development (1972); Equality, the Third World and Economic Delusion (1981); Reality and Rhetoric (1984); and The Development Frontier (1991) (reviewed in Freedom Daily, October 1992.). The spring-summer 1987 issue of the Cato Journal consisted of essays in honor of Bauer by many leading free-market economists.

Bauer’s new collection of essays, From Subsistence to Exchange, offers a valuable overview of his many criticisms of Third World planning and defenses of market solutions for development and growth. The title essay explains the process by which subsistence farmers and producers are spontaneously integrated into the market through the evolution of trading networks by private traders and merchants without government aid or guidance.

These private trading networks create incentives for specialization and division of labor that begins the emergence of increased productivity and of connections with global products and capital markets. Production for “export,” both to other parts of the underdeveloped country as well as the wider world market, enables the earning of money incomes that can then finance the importing of both capital and consumer goods.

These trading networks need neither government support nor government stimulus. Local merchants and budding entrepreneurs possess the particular knowledge of the local circumstances and opportunities that enable the developing trading connections to take the form and shape best suited to the situation in each region and area.

Private profit opportunities, not government directives, are the natural mechanism for starting the process of economic development. What is needed from government, Bauer argues, is security from plunder and theft by both private and political thieves, through the guarding of property rights, contract law, and equal treatment under the judicial system. In addition, low taxes, limited government expenditures, and a noninflationary monetary system are all that government can contribute to helping the development process.

In this context, Bauer also challenges those who insist that population growth is a threat to economic development. First, he explains that it is a dangerous elitist assumption that governments know how many children people in these underdeveloped nations should be permitted to have. The people in these countries are not irrational animals unable to control their sexual passions. Birth control methods of various types were known and practiced long before the manufacturing of modern contraceptives. Family sizes most often reflect conscious choices based on the desirability of and love for wanted offspring.

Second, as market opportunities develop, the people in these countries have new options that often change their preferences for family size without compulsory birth control, abortions, or sterilization. It is precisely through normal market-based interactions with the West that the people (especially women) in underdeveloped lands rethink the value and viability of different family sizes.

The harm of foreign aid

In several essays, Bauer critically analyzes the rationales and consequences of foreign aid by governments and international organizations. Invariably, such financial aid is given directly to or passes through the hands of the governments in Third World countries. The use and disbursement of these funds, therefore, is totally politicized, since it is the political leadership and interest groups controlling the governments who determine for whom and for what purpose the billions of dollars in aid shall be used. These politically based decisions have had nothing to do with the actual market-driven opportunities for which investable funds could have been profitably applied.

Furthermore, foreign-aid transfers from countries in the West have most frequently been justified on the grounds that the poverty of underdeveloped parts of the world is the result of the past racism and colonialism practiced by the nations of Europe and North America. Bauer demonstrates that, contrary to this myth, those countries that have had the most economic contact and trade with the West are those Third World countries that have experienced greater economic growth and development. The greatest poverty is in those parts of Africa, for example, in which commercial and financial penetration from the West have been the least. Continuing poverty in these countries is due either to backward cultural attitudes and traditions antagonistic to commercial relationships or to corrupt and intrusive government policies that have prevented the emergence of secure property rights and networks of free-market transactions.

In an essay entitled “Disregard of Reality,” Bauer suggests some of the reasons for the pervasive misunderstanding of the conditions necessary for economic development. A central element, he says, has been the increasing mathematization of economic analysis during the last 50 years. Reducing the nature of the human condition to quantitative functional relationships in sets of mathematical equations has clouded a true understanding of human action and the historical and institutional processes through which it naturally unfolds. Man becomes nothing more than a quantified and measured “variable” to be manipulated by self-appointed social engineers convinced they know how best to order and arrange the patterns of human interaction and for what purposes.

Thomas Sowell, the well-known free-market economist and social theorist, once praised Bauer as “one of those intellectually heroic figures who has stood fast against the fads and fashions of his time.” The essays in this volume show very clearly why Sowell’s judgment of Bauer was well deserved. If academic and policy thinking about economic development has slowly shifted in a pro-market direction over the last decades, a good part of the credit belongs to Bauer’s unique and important contributions.

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Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

Reading List

Prepared by Richard M. Ebeling

Austrian economics is a distinctive approach to the discipline of economics that analyzes market forces without ever losing sight of the logic of individual human action. Two of the major Austrian economists in the 20th century have been Friedrich A. Hayek, who won the Nobel Prize in Economics, and Ludwig von Mises. Posted below is an Austrian Economics reading list prepared by Richard M. Ebeling, economics professor at Northwood University in Midland and former president of the Foundation for Economic Education and vice president of academic affairs at FFF.